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Uzbekistan Awakes

This article is authored by MOI Global instructor Michael McGaughy[1], Head of Research and Portfolio Manager at Fusion Wealth Management Limited, based in Hong Kong.

Bold Reforms. Since the passing of long-term leader Islam Karimov in 1996 Uzbekistan has undertaken far-reaching reforms. This includes never before seen levels of increased transparency and public involvement in regulations and administration; increased emphasis on civil society and human rights; and restructuring many ministries and government bodies including the state-owned enterprises.

The government’s current five-year plan details a radical change in the government’s role in the economy – from command and control to market-based, from public-sector to private, and from isolationist to trade-oriented and outward looking.

Perhaps the most significant reform for investors is the freeing of its currency in September 2017 with the value of the Uzbek Som virtually halved to its widely used black-market rate of USDUZS 8,100.[2] Overnight, Uzbek assets became half price for USD investors.

The reforms are likely to stick as the leader of the process, President Mirziyoyev, has reportedly reshuffled Uzbekistan’s’ ruling elite. The January 2018 replacement of the powerful National Security Services[3] head Rustam Inoyatov, who ruled the organization for almost 23 years, was perhaps the clearest sign that reformists are in charge.

Attractive Economy. Near and long-term economic basics and outlook are extremely promising. Uzbekistan has low levels of debt, a slight trade surplus, good infrastructure, and near 100% literacy rates. It has ample natural resources, especially gold, natural gas, copper, and uranium. Current GDP growth of 5.1% in 2018 is expected to accelerate to the 6% level over the next few years according to the IMF. Uzbekistan issued its first ever Eurobonds in February, and Uzbek officials have reportedly said that two of its banks and state-owned energy company Uzbekneftegaz may also issue international bonds. Between 2011 and 2019 it moved from 164th place to 79th place in the World Bank’s Doing Business Report. A July 2018 presidential decree set a goal of making it into the top-20 by 2022.

Most importantly it has solid human resources. I met many switched-on, outward-looking, and reform-oriented government and corporate leaders in Tashkent, Navoiy and Samarkand. Not everybody’s on board, but I got the impression that with an average age of 29 years Uzbekistan’s population is open to new ideas.

There’s been a trickle of overseas Uzbeks that have returned and can help the double-landlocked country access foreign markets. There are a lot of Uzbeks holding senior positions around the world, and there’s no reason they can’t do the same or probably more in their home country.

Foreign investors are making a beeline for the country. The ERBD[4] has returned after a decade hiatus and invested in over 21 projects since September 2017. General Motors, Peugeot, Lukoil, Gazprom and a host of other multinationals and regional corporates have invested or announced plans to invest in Uzbekistan. Locals say that grade A and B office space in Tashkent is hard to find.

Stock market’s hibernation is over. Tashkent’s main board, the Republican Stock Exchange (RSE) has been virtually dormant since since the 2008 ‘global financial crisis’ and government clampdown on foreign portfolio currency repatriation. Like the rest of Uzbekistan this is changing, and its young leaders are keen to learn what foreign investors want and how they can upgrade to promote the market.

It’s still small with a market capitalization of just USD 2.6b at the end of February 2019. But with companies trading at low valuations it’s market capitalization could rapidly grow. It’s not hard to find ‘Triple 6s’[5] here.

About The Author: Michael McGaughy

Michael McGaughy, CAIA, manages assets at Research Alpha. An award-winning analyst, Michael has a diverse financial background spanning buy- and sell-side equity research, private equity fund management, and fund-of-hedge funds management. He first came to Asia as an exchange student in 1985 and has been involved with the region ever since, having lived and worked in Beijing, Hong Kong, and Singapore, for different companies including HSBC, the old Crosby Group and StoneWater Capital. In addition to being a CAIA, Mike is also Responsible Officer under Hong Kong's SFC for type 4 (advising) and type 9 (fund management) activities.